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Sir when we calculate relevant cash flow to decide whether the investment in the project should be done or not we do not take into account depreciation as it is a non cash item. But if we think practically, we get profit of the year by taking depreciation into account. As you told in one of the lectures that shareholders are interested in profits of the company and therefore we do Accounting rate of return. if NPV is positive for that project we would accept the project but accounting profit would get go down with this project as we will consider depreciation too to get profit of the year . Will shareholder not get upset with the fact that the profits have gone down
Quite possibly!
There is no one way of appraising projects. Theoretically the best way is to calculate the NPV (and this is by far the most common way asked in the exam) because it looks at cash flows.
In practice, profits do matter to shareholders and so most companies will look at a range of measures in deciding whether or not to go ahead with a project.
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